The rst essay examines the relationship between publicly and privately traded
commercial real estate and macroeconomic risk. To represent publicly traded
real estate, I use exchange listed US Real Estate Investment Trusts (REITs),
and to proxy for direct and privately traded real estate, I use a transaction based
index (TBI) based on the data in the NCREIF database.
Because the fundamental asset of the two investment types are the same, it
seems reasonable to assume that they should be related in the long run. In the
short run there are, however, several investment-vehicle speci c reasons why this
need not be the case. For example, REITs are publicly listed on stock exchanges,
and are thus expected to share a lot of commonalities with other publicly traded
stocks. This is in fact also found by Goetzmann and Ibbotson [1990], Ross
and Zisler [1991], and Myer and Webb [1994]. The fact that REITs are traded
on exchanges makes them more liquid than direct real estate investments, and
investors might therefore accept a lower risk premium for holding REITs, than
for holding direct real estate. However, the lower contemporaneous correlation
between direct real estate and the general stock market gives direct real estate
a diversi cation bene t that may make investors accept a lower risk premium
for investing in direct real estate.